How to determine if a rental property is a good investment

This article explains how to tell if a rental property is a good investment. It gives our favorite shortcut for getting a good deal on an apartment and contains a tool to help you estimate its rental yield if rented on the short-term Airbnb market.

Airbnb rentals need to be attractive, but don’t need large kitchens. This is an advantage when looking for a rental property as other buyers want large kitchens.

Benchmark its return to other assets

There is an entire universe of investment vehicles. However, it is important to benchmark your rental property to assets with similar risk profiles. Investing in Madrid real estate is relatively safe, so it makes sense to compare it to other safe assets.

Bank deposits

When you go to a bank, you can deposit your money in different types of accounts. In general, the more liquid the account, the lower return. For example, regular checking accounts are very liquid, but offer very little return. If you have low balances they can even cost you money, once you factor in the fees.

Money Market Accounts

A money market account is a type of savings account that often requires a minimum deposit, but may offer a debit card and the ability to write checks. According to Nerd Wallet (silly name but their reseach is sound), in February 2019 the 8 best money market account rates ranged between 1.85% and 2.45% annual percentage yield (APY).

High-Yield Online Savings Accounts

High-yield savings accounts are similar to money market accounts, but give you less access to your funds. Typically they do not have ATM cards and do not allow check writing. Because online banks don’t have the expense of maintaining branches, they can offer higher interest rate than traditional savings accounts. According to Nerd Wallet, in February 2019 the best high-yield online savings account rates ranged between 2.10% and 2.45% APY- very similar to money market yields.

Certificates of Deposit (CDS)

CDs are less liquid than money market or savings accounts. Typically they have a fixed term (usually one, three, or six months, or one to five years). Shorter termed CDs have lower yields than longer termed CDs. According to Nerd Wallet, in February 2019 the best CD rates for one to five year termed investment products ranged between 2.5% and 3.3% APY.

Stock Markets

Stocks have a spectrum of risk profiles, ranging from penny stocks (very risky) to relatively safe blue chip stocks. The US Dow Jones Industrial Average (DJIA) is a price-weighted average of the stocks of 30 large American publicly traded companies. It is the most well-known U.S. stock index and is used to gauge the performance of blue chip stocks (companies that are industry leaders). In 2018, the DJIA’s return was -5.97%. Using a calculation including dividend reinvestment, the DJIA returned -3.48% in 2018.

Investing in Madrid real estate is a much safer bet than investing in equity markets

Madrid real estate vs. real estate in other European cities

On average, the annual rental yield on Madrid real estate is 4.6%. These are some of the highest rental yields in Europe. Moreover, you will most likely benefit from property price appreciation when you decide to sell your apartment.

Moving2Madrid’s shortcut for rental property success

We are able to leverge our experience and expertise to help buyers turn ugly ducklings into swans.

Our strategy is to find apartments with characteristics that other buyers hate. Buyers new to the Madrid market see issues that they think are deal breakers and pass on apartments that are actually hidden gems. We know which defects are solvable and leverage them to increase returns for our buyers. These are the types of “defects” that our experience, our trained staff and our excellent network of lawyers and architects can resolve:

1-Apartments in need of refurbishment

Not many people want to take on a full apartment refurbishment, particularly if they live abroad. Therefore, many great apartments are over looked. We have helped over three hundred clients find and refurbish apartments. We know how to manage your renovation so it is stress free.

2- Apartments with legal defects

The Madrid property market has intricacies that often scare foreign buyers. For example, debts are attached to properties, not buyers. Typically when you buy an apartment, there is a mortgage attached to it. This is common practice and it is standard procedure to get the debt cancelled during the closing process. However, many apartments have additional debts attached. These terrify buyers and the apartments have a hard time on the market.

Another scenario is an apartment that is at the center of an inheritance battle.

Our property shoppers know which types of legal defects are solvable. They identify undervalued apartments and work with our legal team to resolve the associated legal issues. Our clients are the winners.

3- Annoying sellers and estate agents

The Madrid property market is fraught with irritating people. Many clients simply don’t want to give them their money. We have learned that this attitude only hurts the buyer. Those with patience and diplomacy can end up getting a good deal on an apartment because others simply walked away. This is a situation where Moving2Madrid adds real value to our clients, because we negotiate for them. All they have to do is sign the documents.

4- Properties with structural “flaws”

Many buyers do not want to live on the ground floor. These apartments are called bajos in Madrid. Bajos sell at a 20% discount to apartments on higher floors. The good news is that this is a non-issue on Airbnb. So if you are purchasing a rental property, you can get a great deal buying an apartment on the ground floor.

Other examples are apartments with ugly entrance ways, or unattractive facades. Again, these features do not matter for rental properties.

One of the most important things to consider is the number of windows. That is because they limit everything: the number of bedrooms, the amount of light, etc.

5- Properties in up and coming neighborhoods

Many buyers only want to buy in chic, established neighborhoods. They either want the prestige associated with them, or they don’t know the Madrid property market well enough to know which neighborhoods are appreciating in value. A great example of this is Lavapiés. On first glance, a foreign buyer might be intimidated by the street art or people selling fake handbags outside of the Metro stations. The truth is, Lavapiés is where Brooklyn was fifteen years ago. It was recently voted the coolest neighborhood in the world by Time Out Magazine. Many of our clients have recently purchased properties in Lavapiés and they are doing very well on the rental market.

Benchmark its yield to comparable rental properties

Our clients have had the best success renting their properties short-term and listing on Airbnb. Although the costs are about 20% higher because you have to pay for someone to manage the property, the incremental return is well worth it. Airbnb properties average a 2.5 time higher rental yield than other rental properties.

To determine if a property is a good investment, we recommend using Airdna’s Market Minder tool. Enter the neighborhood of the apartment. This will bring up a map of the neighborhood. It shows the location of all Airbnbs in that neighborhood. Hover your mouse over each one and you will see the number of bedrooms, the number of bathrooms, the maximum number of guests and the daily price. You can use this information when you calculate the expected rental yield of your property.

Do you need help determining if an apartment is a good investment? Arrange a FREE CONSULTATION with one of our property shoppers now.